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What Are the Benefits of Debt Consolidation?

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Originally Posted On: What Are the Benefits of Debt Consolidation? | Business Articles | ArcaMax Publishing


The problem with piling up too much debt is the high-interest rates and subsequent monthly payments that may spiral out of control.

However, given the current economic situation engendered by the COVID-19 pandemic, debt has become unavoidable for most people. Smart folks are consolidating their debt to make debt repayment more manageable.

Debt consolidation means rolling up all your debt into one single lump sum amount. This makes managing debt far simpler because you only have to make a single payment every month for your debt. There are many benefits of debt consolidation, some that may not be as obvious as you’d think.

Join us today as we highlight some of the many benefits of consolidating debt.

Lower Interest Rate

The primary benefit of debt consolidation is a lower interest rate. With debt consolidation, you only have to pay interest rates for a single debt as opposed to paying multiple interest rates for separate debts each month.

Remember, with multiple debts, each interest rate adds to your monthly payment. If you do the math, you’ll find that paying a single interest rate is way cheaper than paying multiple. The situation worsens if you miss a single payment because you’ll have to pay compounded interest on the next payment.

If you consolidate your debt, you only have to focus on a single interest rate that you pay every month. There’s a high chance the interest rate will be low since you’ll borrow a large amount that you repay over an extended period. By consolidating your debt, you could save a bundle since you don’t have to pay steep interest rates.

Better Financial Management

Managing finances isn’t the easiest of tasks, especially if you have to contend with multiple debt repayments every month. Having a single monthly payment for your debt makes your budgeting and financial organization more straightforward. You won’t be apprehensive about your monthly bill because you know exactly what to expect.

Stay on Track With Payment Deadlines

As mentioned above, the problem with missing a single payment is that the interest gets compounded to the next payment, and you’ll have to pay more. Most people who miss debt payment don’t do so intentionally. Some people just have trouble keeping up with the payment deadlines, especially when riddled with multiple payments.

Making a single payment every month makes it easier to stay on track with the payment deadline. That way, you can sidestep hefty penalties or compounded interest that adds to your tab.

Helps Avoid Collateral Repossession

Collateral repossession happens when you default on your loan repayments, and the lender has to take possession of your personal property. Some people offer their assets as collateral to get lower interest rates on their loans. This is a prudent move, but only if you’re sure you can make full timely payments.

Imagine a scenario where you’ve borrowed multiple loans and offered various assets as collateral. Something tragic happens, and you’re unable to pay back any of the loans. This means the collection agency will come and sweep up your most-prized assets.

However, if you consolidate your debt, you only have to offer a single asset as collateral. If you fail to pay back the loan, you only lose a single asset. This doesn’t sound too bad compared to losing multiple assets at once.

Minimizes Your Monthly Debt Repayment Expenditure

Everyone works with a budget, and you can’t have a large chunk of your monthly income going towards debt repayment. Because debt consolidation combines all debts into one lump sum amount, it also increases the repayment period. That means your debt repayment consists of small manageable monthly payments that you make until you complete paying off the debt.

If you take the other route, you’ll have to dedicate a large portion of your income to paying off your debts. This isn’t sustainable, and you may be forced to default on some of the debts.

Increases Your Credit Score

Consolidating your debt can kick your credit score up a notch. You can improve your credit score by consolidating your debt into a personal loan. In just a few months, you may notice a considerable increase in your credit score because you’ll be increasing your credit utilization ratio.

Credit utilization ratio is the amount of a borrower’s available credit that is currently in use. For instance, if you borrow $10,000 and use only $3,000, you’ll have a 30% credit utilization ratio. A higher credit utilization ratio equals a better credit score.

If you consolidate your debt, it means you’ll be using up most of the money you borrowed. That translates to a large credit utilization ratio which equals a higher credit score. Consolidating debt can improve credit score, but only if you make timely payments.

Reduces Stress

Stepping away from matters finances, consolidating your debt can also be an effective stress reliever. Financial woes have most people wallowing in stress and anxiety. Sometimes a little financial reprieve is all you need to bring back cheer and sunshine into your life.

However, having multiple loans that you can’t repay will only increase your stress. If you consolidate your debt, you can address your financial grievances without stressing about repayment. If you’ve been having sleepless nights because of money problems, consider consolidating your debt and heave a sigh of relief.

How to Consolidate Credit Card Debt

Most people have no qualms about consolidating debt, but they don’t know how to go about the entire affair. If this describes you, here are a few ways that you can consolidate debt.

Get a Personal Loan

Personal loans are a type of unsecured loan that you can use for whatever purpose. This is the most viable option for most people, especially those with an annual percentage rate or APR. The best part is you don’t have to offer any of your assets as security; your income and credit history is enough for approval.

Most banks, credit unions, and financial institutions offer personal loans of up to $100,000 with a twelve-year repayment period. If you’re considering consolidating your debt into a personal loan, don’t forget to pay attention to the repayment period and origination fees.

Also, remember to crunch the numbers before taking out a personal loan. If the interest rate ends up being too high because of the extended repayment period, maybe you should consider other alternatives.

Debt Consolidation Loan

If a personal loan doesn’t fit your fancy, maybe a debt consolidation loan is more your drift. Just like a personal loan, a debt consolidation loan is unsecured, meaning you don’t have to put any of your assets on the line.

As the name connotes, a debt consolidation loan is a loan that exclusively combines multiple debts to a single balance. Not many institutions offer this loan, but you can try your luck with major banks and credit unions.

Debt consolidation loans are great, but you need to tread softly with them. Be extra careful with debt consolidation loans with long repayment periods. They may look good on paper, but you may end up paying a fortune in interest fees when it’s all said and done.

Also, be on the lookout for predatory loans. Predatory loans have mouth-watering teaser rates, but the situation quickly changes after a short period. Some lenders may also charge expensive hidden fees, which beats the purpose of consolidating debt in the first place.

Home Equity Loan

You can consolidate your debt by borrowing against the value of your home. This is what is known as a home equity loan or a cash-out refinance. Since the loan is secured against your home, you should expect high borrowing limits and low-interest rates.

A home equity loan is an excellent way to consolidate your debt if you own a home. However, tying a loan to your home is a risky move. You may have to deal with foreclosure should you fail to repay the loan.

You should also be wary about the high closing costs, which may cancel out the low-interest rates.

Borrow From Your Retirement Funds

If push comes to shove, you should consider borrowing from your retirement funds. Some 401(k) plans allow you to borrow up to 50% of your available retirement funds. You don’t even have to go through the usual loan application process or credit history check.

It’s worth noting that you have to repay the amount in less than five years plus interest. If you don’t, it’s considered an early withdrawal, and you’ll have to pay tax and a penalty on top. If you’re out of the job before you repay your loan, you’ll have to pay the whole amount back before the next tax return filing date or face a stiff penalty.

Benefits of Debt Consolidation in a Nutshell

As seen above, there are plenty of benefits of debt consolidation, as there are ways to consolidate debt. Debt consolidation is a financially prudent way to manage debt and ease financial stress. However, make sure you settle for the right debt consolidation method for the best results.

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